Corporate Law Update

This week we review a significant development, as the Financial Reporting Council publishes its proposals to update and revamp the UK Corporate Governance Code in the wake of the Government’s recent recommendations on corporate governance reform.

We also look at a case in which the court interpreted the phrase “ordinary and proper course of business”.

FRC publishes proposed new UK Corporate Governance Code

The Financial Reporting Council (FRC) has published proposals for a new and revamped UK Corporate Governance Code to replace the existing Code, which has been in place in more or less its current form since 1992.

Key changes to the Code, which applies to companies with a premium listing, include the following:

Workforce engagement. Incorporating the Government’s recommendation that companies adopt one of three models for engaging with their workforce (a director drawn from the workforce; an employee advisory council; or a non-executive director with designated responsibility for workers).

Remuneration committees. Restricting a person from chairing a remuneration committee unless she or he has already served for at least 12 months on any remuneration committee. In addition, remuneration committees would become responsible for overseeing pay, policies and conditions for the company’s workforce generally.

Chair and board independence. Requiring a company’s chair to remain independent at all times, and not merely on appointment, and converting the current factors for deciding whether a director is independent into “hard” conditions for independence.

Diversity. Incorporating the concept of diversity (including social and ethnic diversity) into various parts of the Code, including reporting and succession-planning, driven in part out of the recent Parker Review, and including greater disclosure of gender balance at executive level.

Performance awards. Incorporating the recommendation that awards under long-term incentive plans (LTIPs) be subject to a minimum five-year holding and vesting period.

Scope. Extending those provisions of the Code that currently apply only to FTSE 350 companies to all premium-listed companies.

The FRC is seeking comments on its proposals by 28 February 2018.

Court interprets “ordinary and proper course of business”

A dispute arose between rival parties over the management and control of a company, Koza Limited ("Koza"). Pending resolution of that dispute, Koza gave an undertaking to the court that, until trial or further order, it would not "dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of business" (the "Undertaking").

Koza subsequently wished to incur expenditure falling into four classes. It asked the court to clarify whether the proposed expenditure was within “the ordinary and proper course of business” and, if it was not, to vary the Undertaking to allow it to incur that expenditure.

What did the court say?

The judge reviewed the relevant authorities and said the following considerations were relevant:

Would anobjective observer, with knowledge of Koza, view the proposed expenditure as being made in the ordinary and proper course of its business?

On a proper interpretation of the Undertaking, was theparties’ intentionthat the proposed expenditure would be regarded as in the ordinary and proper course of business for the purpose of the Undertaking?

Subject to the above two points, the fact that proposed expenditure is "unprecedented or exceptional" does not prevent it from being in the ordinary and proper course of business.

If the proposed expenditure were to give rise to a breach of duty by a director of Koza, that would suggest it would not be in the ordinary and proper course of business.

One of the classes of expenditure was no longer relevant at the time of the hearing. The judge went on to find that two of the other classes of expenditure (remuneration for Koza’s CEO up to a specified limit, and expenditure on PR advisers) were within the ordinary and proper course of business.

The remaining class (funding a proposed arbitration) was foundnotto be in the ordinary and proper course of business.

Practical implications

This case involved an undertaking given to the court in a litigation context, and the judge’s conclusions on the individual categories of expenditure turn on the specific facts.

However, the considerations set out by the judge are useful and may assist when deciding whether expenditure is in the ordinary and proper course in other contexts.

Phrases such as "ordinary and proper course of business" or "ordinary course of business" are commonly used in all kinds of contexts, such as:

Undertakings by a seller to a buyer in the period between signing and completing the sale and purchase of shares or assets, which will commonly require the seller not to dispose of target assets or incur expenditure other than in the ordinary course of business.

Warranties in share or asset sale agreements, investment agreements or warranty deeds, which will commonly require the seller, investee company and/or managers to confirm that the target business has not undertaken any significant expenditure or committed certain acts other than in the ordinary course of business.

Restrictions on transactions in joint venture arrangements and shareholders' agreements, which commonly contain carve-outs if the transaction is in the ordinary course of business.

The judgment in Koza provides useful guidance on the approach a court is likely to take when interpreting this wording in these contexts.

Other items

FRC publishes Q&A on non-financial reporting. The FRC has published a series ofquestions and answersto assist companies with applying the new non-financial reporting requirements. The Q&A cover the location of disclosures in the company’s strategic report, how disclosures should be worded, and the factors companies should take into account when making disclosures.

AIM applies for SME Growth Market status. The London Stock Exchange has issued AIM Notice 48 confirming that it has applied for SME Growth Market status for AIM. An SME Growth Market is a type of multilateral trading facility (MTF) subject to slightly different requirements.

For example, from 3 January 2018, issuers on SME Growth Markets will not be required to keep an insider list, provided they can ensure the confidentiality of inside information and produce an insider list to the Financial Conduct Authority on request.

The notice also sets out minor changes to the AIM Rules for Companies that will be implemented if AIM is granted SME Growth Market status.